China Council for the Promotion of International Trade (ccpit) 2009 Preface

Current situation of China's foreign investment in 2008

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Current situation of China's foreign investment in 2008

2008 China's Balance of Payments Report shows that to calculate on balance of payment statistics caliber, foreign direct investment to China was US$ 160.9 billion, up by 8% on a year-on-year basis, which dropped by 65 percentage points than previous year. Withdraw investment and clearing flowed out US$ 13.1 billion, up by 17% on a year-on-year basis, which dropped by 16 percentage points. The net inflow was US$ 147.8,up by 7%, which dropped by 70 percentage points.

In terms of sector composition of foreign direct investment, China's non-financial sectors absorbed US$ 146.2 billion, up by 3%. The financial sectors absorbed US$ 14.7 billion, up by 88%. The main features of non-financial sectors attracting foreign direct investment are as follows.

The sources of foreign direct investment in China are quite concentrated. In 2008, the top ten countries or regions were: Hong Kong, China (US$ 70.1 billion), United States (US$ 5.9 billion), Singapore (US$ 5.5 billion), Taiwan, China (US$ 5.2 billion), Japan (US$ 4.5 billion), Korea (US $ 3.4 billion), Britain Virgin Islands (US$ 3.0 billion), Cayman Islands (US$ 1.7 billion), France (US$ 1.4 billion), and Germany (US$ 1.4 billion). Investment from the top ten countries or regions accounted for 91% of the total investment over the same period. Investment from some free-trade ports declined slightly. In 2008, the direct investment from ports including Virgin Islands, Cayman Islands, Mauritius, Barbados, Western Samoa and Bermuda stood at US$ 7.2 billion, decreased by 2% over the previous year, accounting for 6% of China's absorption of foreign direct investment.

The east of China gathers the main foreign direct investment while the investment in the west grew rapidly. In 2008, the investment in east areas such as Jiangsu, Shanghai, Guangdong, Beijing and Zhejiang accounted for 81% of total investment in China, down by 14% over the previous year. Investment of middle area of China such as Hubei and Anhui accounted for 9% of total investment in China, down by 6% over the previous year. The west attracted 10% investment, up by 19% over the previous year. The foreign direct investment growth in the west grew faster than in the east and the middle, up by 1 percentage point over the previous year. But the total amount in the west far lagged behind the east.

According to the industry structure of foreign direct investment fund in 2008, the followed industries enjoyed popularity from foreign investment and saw large increase, to make it detailed, 41% in mining industry, 46% in education, 32% in resident services and other services, 20% in agriculture and forestry, and 10 % in animal husbandry and fishery. The actual utilization of investment in real estate, accommodation and catering industry, leasing and business services, as well as information transmission, computer services and software industry fell down rapidly, which is 30% in real estate, 30% in accommodation and catering industry, 47% in leasing and business services, and 23% in information transmission, computer services and software industry. The investment in manufacturing, architecture and transportation industry declined slightly, which is 8%, 10% and 10% respectively.

    1. Foreign investment competition in food and beverage industries

The huge food and beverage market in China with 1.3 billion population attracts foreign investment. The international food and beverage tycoons must come to China to expand global business. As a country with the largest population in the world, China's population base is a big piece of cake for this industry. Meanwhile, China boasts of the rapidest and sustainable economic growth and its development room and growth potential in food and beverage industry are obvious to all.

In recent years, China's food and beverage industry has seen more and more mergers and acquisitions of foreign investment with increasing enterprise scale. Almost every year this industry is on the list of China's Top Ten M & A Events launched by China Mergers & Acquisitions Association, Global M &A Research Center and Changyu Group transferred stock right in 2005. American AB acquired Harbin Brewery in 2004. Japanese Asahi Breweries and Itochu Corporation both joined in Masterkong holdings in the same year. In 2006, InBev acquired Fujian Xuejin Beer. Shineway Group attracted investors by transferring the whole stock. In 2008, Coca-Cola acquired Huiyuan.

In addition to industrial capital, financial capital is also active in joining the stocks of fast growing food and beverage enterprises released at late times. It obtains high returns from listing overseas of these enterprises. Morgan Stanley investing Mengniu Dairy and the Goldman Sachs investing Yurun Food are successful examples. Furthermore, Mengniu Dairy, Yurun Food and Dynasty Wines listed in Hang Kong in recent 2 years have been warmly sought and actively acquired by overseas investors. The leading food and beverage companies on China's Shanghai and Shenzhen stock markets also gained popularity from QFII.

Various indications show that foreign investors are becoming more and more interested in China's food and beverage industry. Dine and wine of 1.3 billion people has become a focus of international industrial capital and financial capital. The coming few years will see more foreign investment M & A cases in China's food and beverage industry.

    1. Foreign investment competition in daily chemical industry

At present, the market capacity of China's daily chemical industry was approximately 80 billion yuan, 70% of which has been occupied by foreign brands, leaving the 30% in second and third-tier cities and rural market. The final local brand market has also become jittery. In fierce competitions, daily chemical consumer goods enterprises will choose M & A to expand scale, enrich products and reduce risks.

By the end of 1980s and at the beginning of 1990s, foreign tycoons like P & G, Unilever and Henkel entered Chinese market in form of joint-stock due to policy reasons. In this joint-stock movement, local brands essentially transferred their own brands and facilities to foreign companies and only took less than half shares. As a result, some brands faded gradually out of people's eyes. Some enterprises bought the local brands back (such as MAXAM and Power 28 of Shaishi) and realized brand return. However, they had a sea of troubles to obtain the market share in a changed market. China now has over 4000 daily chemical enterprises and about 20,000 cosmetic brands. But only over 50 enterprises produced a sales revenue over 100 million yuan. Among which, P & G generated a sales revenue of 15 billion yuan in 2004. At the beginning of M & A, the foreign sides usually took full control of the resource advantages such as acquired brand channels and implanted their own brands. Later they would hide the acquired brands and dominated the market from high to low end with bargaining power of international brands and brands dislocation. Through M & A and brands suppressing, the foreign sides took advantages of abundant capital and made the domestic enterprises as their local factories.

In detergent market, three of the top four detergent enterprises with an annual output over 80,000 tons in China were acquired by foreign funds. Attributed to brand advantages and tax incentives, U.S. P & G has almost driven out domestic detergent enterprises. The top ten detergent brands in China almost annihilated completely. Only the four brands including Rejoice, Head & Shoulders, Pantene and VS Sassoon covered more than 60% of domestic market, exceeding the monopoly line recognized internationally. In cosmetics market, L'Oreal from France is expanding in Chinese market rapidly. Acquiring Mininurse in 2003 and Yue-Sai in 2004, L'Oreal ranked No.1 in make-up products and No.2 in skin care area. Foreign investment becomes the leader of China's cosmetic market competition. Transnational corporations occupy the high-end domestic market and then will further develop in low and middle-end brands to strike the local enterprises. For instance, Uniliver has promoted stationing distribution in second and third tier cities. P &G reduced the prices of Rejoice and Tide dramatically and made great effort in promoting Olay sales in China. After acquiring Mininurse, L'Oreal was seeking for partners to open up third tier cities and rural market. As the No.1 local enterprise in skin care in 2008, Beijing Dabao was put on the transfer list in Beijing Equity Exchange and finally transferred its full ownership to Johnson & Johnson.

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